Novartis' China Ambitions

November 09, 2004

China is a top priority -- and major worry -- for many of the world's top pharmaceutical companies. With earth's largest population and fastest-growing major economy, China is a lucrative new market for the makers of Viagra, Prozac, and other blockbuster drugs.

But the Middle Kingdom has a reputation worldwide for being a hotbed of piracy and counterfeiting, making it difficult for American and European pharma outfits to protect their intellectual-property rights. Daniel Vasella, chairman and CEO of Swiss giant Novartis (NVS), was in Beijing on Nov. 9 to attend the annual BusinessWeek CEO conference in Asia (for more coverage, see BW Online, 11/10/04, "The Branding of China" .) Vasella spoke with Assistant Managing Editor Robert Dowling, Asia Economics Editor Bruce Einhorn, and Asia Correspondent Frederik Balfour about the company's China strategy. Edited excerpts from their conversation follow:

Q: How important is China?

A: If we look at the market today, it's about $8 billion and projected to grow to $24 billion by 2010. So it's still in a rapid growth phase. It's the No. 10 [biggest market] worldwide, which is already quite something, and it will go up the rank because it grows currently at 20% -- significantly faster than the average market growth. It's one of the important markets, no question. Here, we are the second-largest company after Pfizer (PFE) and growing at about twice the market.

Q: What's the key factor driving the growth of the Chinese market?

A: The market is growing because, first, we know in all countries, you have an average of 1.7% growth in the health-care market for every 1% growth of gross domestic product. So it's overproportional. That has to do with the desire of people to access better medical services, therapy, and diagnostics. At the same time, in China you have an evolution of the market, in the sense that you get better coverage. Still, there are lots of people with no coverage, but [there are people getting] better coverage.

Secondly, there's the emergence of retail pharmacies, which is a new phenomenon. But we do not yet see the emergence of private practices in any significant number, and we still have about 14,000 distributors for pharmaceuticals, so it's a highly fragmented and inefficient system.

Q: How is Novartis doing?

A: Last year, we sold about $120 million. We gained market share. The objective is to continue to gain market share. This year, growth is over 40% for the first nine months. So it's very dynamic.

Q: What do you have to do to expand your sales?

A: Our customers are mostly on the coast and the big cities. Now it's an expansion into the country. Really, the expansion is going from the cities, the coast, toward the inside, which requires new organizational setups basically. In order to grow, we need three things: geographical expansion, good products, and thirdly and most difficult right now, we need good people in numbers. It's still a challenge to find well-trained people, especially for management positions, so we have put in a lot of efforts in training and development of people. But if you have that, there's still a lot of growth opportunity.

Q: But China is notorious for its lack of intellectual-property rights protection -- and Pfizer just recently lost the patent to Viagra in a Chinese court. How can you operate in such a climate?

A: The progress that has been achieved is significant. In our experience, in every case where we had basically counterfeits or unauthorized generics, the government did act. The big issue is implementation. Implementation is one thing here [in Beijing], and a second thing across the country. Obviously, it's easier to get implementation in the well-known cities than somewhere else in the country.

Q: Is the problem that the Chinese don't see that it's in their interest to be more vigilant?

A: I would say in the discussions with government representatives the principle of IPR [intellectual property rights] is understood [and] why IPR is so essential for innovation. Nobody will go invest for 15 years just to see somebody else copy your product. If you want a Chinese startup biotech industry, you have to give them the outlook of a profit, or otherwise nobody will do it. It's like saying to a farmer, "Go plant your seed on somebody else's land who will then take the crop." Nobody will do that. It's nonsense.

Q: How has the situation changed over the years?

A: If you ask me how was it in 1992 and 2004, there's a huge difference. If you talked about IPR before to the government, they would say "That's wonderful, but we can't afford it." Today, they say "Yes, it's clear. It's very important. We understand if we want to have research, we have to protect intellectual property."

Q: But will change happen quickly?

A: We have 6,000 pharmaceutical manufacturers [in China today]. We will have a huge consolidation and cleanup. You can't do that overnight. These people have to be employed. So you can't just clamp down overnight.

Q: Novartis is expanding its R&D in China. Why?

A: We are investing especially in "D." We have been bringing in experts from Europe to establish centers in hospitals with good clinical practice to allow us to conduct clinical trials here in China. We have 800 patients in trials. Next year, it will go up to 3,000.

Q: Is that to save money?

A: It's a big issue to get fast access to a large number of patients. Clinical trials have gotten ever larger. To get access in several countries at the same time to patient populations and have [data that] can be given to authorities like the FDA [U.S. Food & Drug Administration] -- that want to doublecheck -- is very important. Therefore, you need absolutely stringent quality standards. You need to demonstrate how it's being done, for each and every patient. China is one portion of a global trial.

Q: You've been building up your research capability in Boston. Besides Europe and the U.S., are you also looking at Asia -- say, China or India?

A: China could be the third one. India is good in chemistry and so forth, but I believe this place probably has more potential. It's the determination, the support by the central government for research and science, [and] it's the openness to research and science. There are no hindrance blocks from the point of view of determination. And you have certainly the people -- the number of people who are coming up in science will be substantial.

Q: Will there remain a cost advantage?

A: I'm not sure. For the time being, certainly. Will they give tax credits, for example, and other credits for international companies to invest? That remains to be seen. And especially with the topic we talked about, IPR, the confidence that they will stick to it. It's something that is in the forefront of our thinking now. It's going in the right direction, but it takes time.